CTC Portfolio Management & Strategy 3

Question 1

A portfolio manager uses the specific identification method for selling mutual fund shares. What is the primary tax advantage of this method over FIFO?

Accepted Answer

It allows selection of high-basis shares to minimize current taxable gain

Answer

Specific identification lets the investor designate which shares (typically highest-cost) to sell, minimizing the recognized gain or maximizing the recognized loss.

Question 2

A client receives a Schedule K-1 from a limited partnership showing a $20,000 passive loss. Under the passive activity rules, this loss can generally be deducted against:

Accepted Answer

Passive income from other passive activities

Answer

Under IRC §469, passive losses may only offset passive income; they cannot offset active income (wages) or portfolio income (dividends, interest).

Question 3

For alternative minimum tax (AMT) purposes, which portfolio-related preference item is added back to regular taxable income?

Accepted Answer

Municipal bond interest from private activity bonds

Answer

Interest from private activity municipal bonds is exempt for regular tax but is an AMT tax preference item that must be added back when calculating AMTI.

Question 4

A taxpayer has $8,000 of net short-term capital losses and $5,000 of net long-term capital gains. What is the net result for the current year?

Accepted Answer

$3,000 net short-term loss deductible against ordinary income

Answer

Short-term losses first offset long-term gains; the remaining $3,000 net short-term loss is deductible against ordinary income (up to the $3,000 annual cap).

Question 5

A CTC recommends placing growth stocks in a Roth IRA rather than a traditional IRA. What is the primary tax rationale?

Accepted Answer

Tax-free Roth growth benefits are maximized when assets appreciate significantly

Answer

Since Roth IRA qualified distributions are tax-free, placing high-growth assets there maximizes the benefit because the entire appreciation is never taxed.

(CTC) Chartered Tax Consultant Practice Test

(CTC) Chartered Tax Consultant Practice Test

CTC Portfolio Management & Strategy 3